Three Misconceptions Business Owners Should Avoid in Planning a Successful Business Exit

The thought of exiting a business is daunting for most business owners. Whether the exit will be through a sale, merger, or succession, there will be profound impacts on the future of the company, the owner, their family, and their legacy. This makes it crucial for owners to carefully plan and execute a business exit with guidance from the right partners.

There are numerous misconceptions business owners may have about how, when, and why to exit a business. To shed light on three of these key misconceptions, we hosted a series of conversations with expert guests to help business owners be prepared when the time comes to start their next chapter.

1. The Myths vs. Realities of Business Exit Planning

One of the most persistent misconceptions surrounding business exit planning is the belief that planning is only necessary for large corporations or family-owned businesses. In reality, every entrepreneur exits their business. It’s not a question of if, but when and how, regardless of business size or structure.

A related misconception is that the timing of succession planning should align with a nearing retirement. Unfortunately, unexpected life events such as illness or economic downturns can force a sudden transition. Don’t wait. Business owners should start the planning process early to ensure they have prepared for any eventuality, whether the plan is to leave in five years or twenty years. A well-thought-out plan will address leadership transitions, financial structures, and long-term strategic goals both for business success and the exiting owner’s personal financial legacy.

For detailed insights, watch out webinar Myths and Realities of Business Succession Planning.

2. Accurately Valuing a Business Requires a Blend of Art and Science

Accurately valuing a business entity is essential for ensuring a fair transaction and attracting the right buyers. Another common misconception among business owners relates to the means of valuing their business. The proper valuation process is a blend of science and art and helps avoid an over- or under-estimation.

The Science of Valuation

The science of business valuation typically involves standard financial metrics such as revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), cash flow, and industry-specific multiples. Financial experts will assess the company's historical performance, financial statements, and profitability trends. This data-driven analysis forms the foundation of a business’s valuation, giving the owner an objective picture of its worth.

According to Vanessa Brown Claiborne, Chaffe & Associates President and CEO, there are different valuation models to consider:

• An asset-based valuation approach looks at the costs to recreate the business – essentially, what would it cost the buyer to purchase the equipment and hire the employees?
• The market-based valuation approach compares a business to other similar businesses that have sold, as guidance on pricing. The market approach can provide insights into how people are feeling about the industry and the economy as a whole.
• The income-based valuation approach, which is the most common method, looks at the potential future earnings of the business by looking at historical trends and growth potential.

The Art of Valuation

Valuation is not purely about numbers. Intangibles such as brand strength, customer loyalty, and market position along with intellectual property or proprietary technology may not show up in a financial statement but can significantly influence a buyer’s perception of value.

Four non-financial characteristics buyers look for when evaluating business value include:

1. Next-level management - Establishing the best possible management team gives owners the best chance to receive the best possible price for their business because management implements and oversees all other value drivers.
2. Diversified Customer Base - Buyers typically look for a customer base in which no single client accounts for more than 10% of total sales.
3. Operating Systems - Establishing and documenting standard procedures and systems to increase cash flow show buyers a business can maintain profitability after the sale.
4. Growth Strategy – An effectively communicated and detailed growth plan will help attract buyers. Buyers will give credence to the current growth plan if previous plans have achieved their goals.

For a more in-depth look at valuing your business, watch our webinar: The Art and Science of Valuing a Privately Owned Company

3. The Difference between Strategic vs. Financial Buyers

Business owners may have misconceptions about the type of buyer interested in their business. When selling a business, it is essential to understand what a buyer is looking for in a business. Typically, buyers fall into two categories:

1. A strategic buyer, likely a competitor or another company operating in the space, will buy a business for growth and expansion opportunities. There is usually a benefit of synergies from combining the company for sale with their own.
2. A financial buyer, such as a private equity firm, is motivated by expected financial return. Financial buyers typically hold onto a business for five years, and then look to exit it through a sale or taking the company public. Financial buyers typically pay less than a strategic buyer because there are no synergies that come from the combination

Regardless of the motivation behind the purchase, buyers tend to look for several key trends according to Les Alexander, professor of practice at University of Virginia Darden School of Business:

• A stable & growing business - consistent financial performance year-over-year that is not volatile.
• Recurring & contractual revenue – helps the buyer know what to expect in the coming year.
• Profitability – buyers look for EBITDA margins to be 10% or higher signaling a stable, mature, and attractive business.

For a deeper exploration of what buyers are looking for, as well as an overview of the process of selling a business, watch our webinar: What Will the Buyer Want from Your Business?

Plan for Success

Exiting your business is a complex process, and having the right guidance can help simplify your life. Ensuring a successful and lucrative business transition requires a strategic approach, proper planning including a clear understanding of the valuation process and awareness of buyer expectations, and careful execution. To ensure a smooth transition, start the process early and work with experienced advisors like Hancock Whitney.

Learn more with our Business Exit Checklist and other Business Exit Planning resources or contact a private banker to discuss your business exit today.

The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

Hancock Whitney Bank offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.

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